China, Money

Getting Money Out Of China. Good Luck With That.

When it comes to foreign currency outflow, China's laws on the books have not changed, but the reality on the ground has.

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US china flagsI got a call the other day from a U.S. law firm that uses our China lawyers to consult on litigation matters involving Chinese companies. The law firm was calling to see about our serving a Chinese defendant with a complaint in a products liability action.

The first thing I did was tell them how we had a 100% success rate in serving Chinese companies with Hague process, but our strong sense was that “the rules on serving Chinese companies in China had changed.” I explained how China is now making great efforts to prevent foreign currency from leaving China and since the possibility of a Chinese company losing a lawsuit outside China meant the possibility of foreign currency leaving China, China’s Ministry of Justice is creating service of process issues where none existed previously.

The above is just one of the many doing business with China (legal business in the above instance) has changed due to China’s efforts to block or at least slow down a foreign currency exodus.

I first wrote about China’s newish foreign currency restrictions on January 14, in Getting Money out of China: What the Heck is Going on? In that post, I mentioned how “in the last week or so, our China lawyers have probably received more ‘money problem’ calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.”

I then talked about how the common theme we were detecting was that “China banks seem to be doing whatever they can to avoid paying anyone in dollars.” I then listed the following as examples we were seeing/hearing that supported this theme:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until very recently.

2. Chinese citizens are allowed to send up to $50,000 a year out of China, pretty much no questions asked, but these funds too are being blocked. It feels like every realtor in the Western United States and Western Canada has called us on this one. The Wall Street Journal wrote on this last week. Never heard this one until recently.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof the transaction is real. We heard this regarding transactions with Indonesia and with Cambodia, from clients with subsidiaries there. Never heard this one until recently.

4. Money will not be sent for transactions, especially services, often used to move money out of China illegally. This is not exactly new, but China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show it does not have any Chinese owners. The alleged purpose behind this “rule” is to prevent transactions ordinarily used to illegally move money out of China. This one is new to us too.

Then again, exactly a month later, we wrote Getting Money out of China by Losing in Arbitration, about a company that wanted to retain my law firm to concoct a fake U.S. arbitration it would lose so it could then get a large sum of money out of China as payment on the (essentially fake) arbitration award. The Wall Street Journal then interviewed me on this incident for its own story, China Capital Flight 2.0: Lose A Lawsuit On Purpose, which in turn was picked up by the Chinese media and Internet and pretty much went viral from there.

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Earlier this week, Canada’s National Post did a story, Crackdown on Chinese capital flight ‘will impact’ local real estate, on how China’s crackdown on foreign currency outflows would necessarily impact the influx of Chinese real estate buyers in Vancouver:

Much of that money was destined for hot West Coast real estate markets from Vancouver to Los Angeles. In Vancouver it’s debated whether President Xi Jinping’s government can stop the flood.

Seattle lawyer Dan Harris ­— an expert on facilitating trade with Chinese businesses — said that since January, China has aggressively clamped down on capital flight.

Harris said U.S. realtors are calling his firm more and more often for help in getting cash out of China for luxury home sales that were easily completed in the past.

“That will impact real estate in Vancouver and Seattle,” Harris said in an interview.

“If anyone thinks the Chinese government will not stop people from sending $3 million out to buy a house in Vancouver? Wow. I don’t know what they know that I don’t.”

Harris said Chinese companies seeking to invest in North American real estate started having trouble about three months ago as business transfers were examined more closely.

Last week, in Chinese Consumers Race to Buy Dollars as Yuan Slides [subscription required, but the full article is here in the Australian Business Review], the Wall Street Journal wrote again on how China’s crackdown on foreign currency flows is impacting international business transactions. The article starts by affirming exactly what our China lawyers have been hearing and saying: Beijing is suggesting/telling/pressuring China’s banks to slow down the foreign currency outflow. China’s laws on the books have not changed, but its on the ground reality has:

Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for US dollars to do business.

China’s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions.

It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders.

Banks, in turn, have increased scrutiny of foreign-currency transactions by businesses ranging from Chinese entrepreneurs investing abroad to companies paying overseas bills.

The article provides the following examples of companies having troubles due to China’s foreign currency clampdown:

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  • A European chemical manufacturer (presumably its China WFOE) was delayed in obtaining U.S. dollars in Shanghai, threatening its deadline for an overseas licensing payment.
  • The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering.
  • A water-treatment company struggled to withdraw $2,000 for an engineer to travel to the U.S.
  • A Chinese company having problems wiring $15 million to a Hong Kong company that for two years had been helping the Chinese company buy equipment for a South American factory.

This foreign currency clampdown is apparently working, as “economists say tightened capital controls are one reason China’s foreign reserves fell only $US28.6 billion in February, less than a third the drops of the two previous months.”

The WSJ article ended with this fascinating/scary statistic:

If 5 per cent of China’s 1.4 billion people used their full quotas [USD$50,000 in funds allowed to leave China each year], the $US3.5 trillion in foreign-currency demand would drain its ­[China’s] reserves.

China’s new restrictions on foreign currency outflows are literally changing how my firm’s China attorneys practice law in the sense that we now must account for these new currency restrictions on any transaction that might involve money flowing from China to some other country. We are now always looking at whether the money can originate from somewhere other than China and we are also always looking to draft our China contracts so as to minimize China currency-blocking triggers.

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Portland, San Francisco, Barcelona, and Beijing. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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